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CA Foundation · Business Economics · International Trade

A country imposes an import tariff on a good that it also produces domestically, and it is a small country unable to influence world prices. Compared with free trade, what is the effect on domestic consumers and producers?

A tariff raises the domestic price above the world price. Consumers pay more and consume less, so they lose, while domestic producers receive a higher price and produce more, so they gain. The government also earns tariff revenue, but there is a net deadweight loss.

  1. AConsumers gain and producers lose
  2. BBoth consumers and producers gain
  3. CConsumers lose because of a higher price, and producers gain from a higher price and outputCorrect
  4. DBoth consumers and producers lose

Explanation

A tariff raises the domestic price above the world price for a small country. Consumers pay more and buy less, so they lose surplus, while domestic producers receive the higher price and expand output. The option stating consumers gain reverses the effect.

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